Late last year, an advisor I truly respect related his experience with a client, a 62-year-old physician with a conservative $6 million portfolio. Though the client had indicated she could handle a 10% drawdown, she discovered that she felt quite different when her portfolio dropped a mere 3% during the correction last August and September.
Needless to say, the advisor felt compelled to revisit her risk capacity. Given what has happened during the first two weeks of 2016, his decision was propitious, even though this physician was someone who spent between 2% and 4% of her assets and was several years away from retirement.
Since the most unloved bull market in history started in 2009, there have been precious few corrections. All have had reasonable causes—from the 2010 flash crash to the credit downgrading of the U.S. Treasury to the taper tantrum to China’s recurrent economic woes in 2015 and early this year.
But all of these temporary disturbances proved transient. The guess here is that two other interrelated factors, demographics and valuations, are likely to influence the equity markets going forward as much as what the Fed does or what happens in China.
America faces many challenges arising from an aging population. But global demographics is one of the few trends that can be predicted 20 years out with a high degree of certainty, and America’s future looks much brighter than Europe’s, Japan’s or China’s.
Additionally, the U.S. labor market has enjoyed a great deal more flexibility than other nations with mandatory retirement ages, so it should be able to adapt to changes in longevity in ways that would pose massive challenges in France or Spain. One can view it as a positive or negative, but many Americans have managed to re-enter the labor force since the Great Recession ended.
Economic adaptability may partially explain why U.S. equities have performed so much better over the last six years than those in other major countries. At the same time, valuation levels need to remain realistic and recognize that America is becoming an older country unlikely to see the same economic growth rates it did in the last century.
As Mike Martin writes on page 26, it is quite possible global capital could continue to flow into the U.S. later this year. Just don’t expect equities to continue on their vertical post-2008 trajectory.
That probably ended in 2014.